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PIG TODAY-Traders brace for dollar at ¥100 if Bank of Japan disappoints

Author

bily

| Published on

September 20, 2016

Investors are trapped in an unbearable waiting game ahead of the Bank of Japan and Federal Reserve meetings, with currency traders in particular eyeing the Wednesday announcements with caution.

And for good reason—analysts are predicting a major shake-up in foreign exchange trade if the two central bank mastodons surprise the markets, which could send the yen USDJPY, +0.00% soaring again despite the Bank of Japan’s wishes.

The Japanese currency has already strengthened from ¥103.35 against the dollar a few days ago to ¥101.75 on Tuesday, but could rally to as high as ¥100 against the dollar if the BOJ fails to impress investors, analysts said.

“The chances of a USDJPY falling to 100 is very likely if the Bank of Japan fails to take meaningful action,” said Ana Thaker, market economist at PhillipCapital UK, in emailed comments.

The dollar hasn’t traded at ¥100 since mid-August.

“In order to significantly weaken the yen in the long term, the Bank of Japan would have to implement both a rate cut and substantial monetary easing,” Thaker said.

“Equally, if the Fed holds off on raising rates, we could see considerable dollar weakness and see markets enter long yen trades regardless of how the BOJ acts before the Fed. As much as the BOJ attempt to weaken the yen, as global uncertainty persists and a risk-off attitude prevails, the yen will strengthen,” she added.

Japanese policy makers have fought hard in recent years to battle low inflation, slow growth and a strong yen, lowering rates into negative and launching an aggressive asset-purchase program. However, there is an increasing sense the measures are losing their effect and not producing the expected results.

“There’s no doubt, that after two consecutive disappointments, the bar has never been set higher”Kay Van-Petersen, Saxo Capital Markets

The BOJ members are now sharply divided over the best way to proceed as the yen refuses to weaken significantly and the country’s banking sector is starting to feel the pinch of low rates and a flat yield curve.

There’s mounting speculation the central bank will undertake an “inverse twist” operation and take steps to steepen the yield curve by lowering purchases of long-dated Japanese government bonds by the central bank. That would help offset some of the adverse side effects from negative interest rates, as it would allow banks to borrow cheaply and lend at a higher rate.

“There’s no doubt, that after two consecutive [policy] disappointments, the bar has never been set higher,” said Kay Van-Petersen, macro strategist at Saxo Capital Markets in Singapore, in a blog post.

“But the BOJ is very divided in terms of the outcome. We could see a complete pass where all they are doing is assessing and discussing how effective or ineffective their measures have been so far,” he said.

If the central bank disappoints, the dollar could quickly drop to its pre-Jackson Hole level of around ¥100.50 and continue its slump to ¥100, Van-Petersen said, referring to the Fed’s Wyoming retreat in late August.

“It’s worth bearing in mind that the BOJ meets before the Fed, so the full impact on the yen strengthening could come after the Fed meeting,” he noted.

The Bank of Japan will announce its policy decision before the U.S. open on Wednesday, while the Fed’s rate decision is due at 2 p.m. Eastern Time. Fed Chairwoman Janet Yellen is scheduled to hold a news conference at 2:30 p.m.

Investors are trapped in an unbearable waiting game ahead of the Bank of Japan and Federal Reserve meetings, with currency traders in particular eyeing the Wednesday announcements with caution.

And for good reason—analysts are predicting a major shake-up in foreign exchange trade if the two central bank mastodons surprise the markets, which could send the yen USDJPY, +0.00% soaring again despite the Bank of Japan’s wishes.

The Japanese currency has already strengthened from ¥103.35 against the dollar a few days ago to ¥101.75 on Tuesday, but could rally to as high as ¥100 against the dollar if the BOJ fails to impress investors, analysts said.

“The chances of a USDJPY falling to 100 is very likely if the Bank of Japan fails to take meaningful action,” said Ana Thaker, market economist at PhillipCapital UK, in emailed comments.

The dollar hasn’t traded at ¥100 since mid-August.

“In order to significantly weaken the yen in the long term, the Bank of Japan would have to implement both a rate cut and substantial monetary easing,” Thaker said.

“Equally, if the Fed holds off on raising rates, we could see considerable dollar weakness and see markets enter long yen trades regardless of how the BOJ acts before the Fed. As much as the BOJ attempt to weaken the yen, as global uncertainty persists and a risk-off attitude prevails, the yen will strengthen,” she added.

Japanese policy makers have fought hard in recent years to battle low inflation, slow growth and a strong yen, lowering rates into negative and launching an aggressive asset-purchase program. However, there is an increasing sense the measures are losing their effect and not producing the expected results.

“There’s no doubt, that after two consecutive disappointments, the bar has never been set higher”Kay Van-Petersen, Saxo Capital Markets

The BOJ members are now sharply divided over the best way to proceed as the yen refuses to weaken significantly and the country’s banking sector is starting to feel the pinch of low rates and a flat yield curve.

There’s mounting speculation the central bank will undertake an “inverse twist” operation and take steps to steepen the yield curve by lowering purchases of long-dated Japanese government bonds by the central bank. That would help offset some of the adverse side effects from negative interest rates, as it would allow banks to borrow cheaply and lend at a higher rate.

“There’s no doubt, that after two consecutive [policy] disappointments, the bar has never been set higher,” said Kay Van-Petersen, macro strategist at Saxo Capital Markets in Singapore, in a blog post.

“But the BOJ is very divided in terms of the outcome. We could see a complete pass where all they are doing is assessing and discussing how effective or ineffective their measures have been so far,” he said.

If the central bank disappoints, the dollar could quickly drop to its pre-Jackson Hole level of around ¥100.50 and continue its slump to ¥100, Van-Petersen said, referring to the Fed’s Wyoming retreat in late August.

“It’s worth bearing in mind that the BOJ meets before the Fed, so the full impact on the yen strengthening could come after the Fed meeting,” he noted.

The Bank of Japan will announce its policy decision before the U.S. open on Wednesday, while the Fed’s rate decision is due at 2 p.m. Eastern Time. Fed Chairwoman Janet Yellen is scheduled to hold a news conference at 2:30 p.m.

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